Financial Environment

Financial environment refers to all the financial institutions and financial market around the
company that affects the working of the company as a whole.

The financial environment has a number of factors. It includes the financial institutions,
government, individuals and firms around the business.

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including
banks, insurance companies, pensions, funds, etc. constitute the financial system.

Features of the Indian Financial system:

• It plays a vital role in the economic development of the country as it encourages both
savings and investment
• It helps in mobilising and allocating one’s savings
• It facilitates the expansion of financial institutions and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the one saving
• It is also concerned with the Provision of funds

The financial system of a country mainly aims at managing and governing the mechanism of
production, distribution, exchange and holding of financial assets or instruments of all kinds.

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets

1. Financial Institutions

The Financial Institutions act as a mediator between the investor and the borrower. The
investor’s savings are mobilised either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

• A short term liability can be converted into a long term investment

 • It helps in conversion of a risky investment into a risk-free investment
• Also acts as a medium of convenience denomination, which means, it can match a
small deposit with large loans and a large deposit with small loans
The best example of a Financial Institution is a Bank. People with surplus amounts of money
make savings in their accounts, and people in dire need of money take loans. The bank acts as
an intermediate between the two.

The financial institutions can further be divided into two types:

• Banking Institutions or Depository Institutions – This includes banks and other

credit unions which collect money from the public against interest provided on the
deposits made and lend that money to the ones in need
• Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual
funds and brokerage companies fall under this category. They cannot ask for monetary
deposits but sell financial products to their customers.
Further, Financial Institutions can be classified into three categories:

• Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
• Intermediates – Commercial banks which provide loans and other financial
assistance such as SBI, BOB, PNB, etc.
• Non Intermediates – Institutions that provide financial aid to corporate customers. It
includes NABARD, SIBDI, etc.

2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based on
the different requirements and needs of the credit seeker, the securities in the market also
differ from each other.

Some important Financial Assets have been discussed briefly below:

• Call Money – When a loan is granted for one day and is repaid on the second day, it
is called call money. No collateral securities are required for this kind of transaction.
• Notice Money – When a loan is granted for more than a day and for less than 14
days, it is called notice money. No collateral securities are required for this kind of
transaction.
• Term Money – When the maturity period of a deposit is beyond 14 days, it is called
term money.
• Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending money to
the Government.
• Certificate of Deposits – It is a dematerialised form (Electronically generated) for
funds deposited in the bank for a specific period of time.
 • Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help to
get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

• Banking Services – Any small or big service provided by banks like granting a loan,
depositing money, issuing debit/credit cards, opening accounts, etc.
• Insurance Services – Services like issuing of insurance, selling policies, insurance
undertaking and brokerages, etc. are all a part of the Insurance services
• Investment Services – It mostly includes asset management
• Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part
of the Foreign exchange services
The main aim of the financial services is to assist a person with selling, borrowing or
purchasing securities, allowing payments and settlements and lending and investing.

4. Financial Markets

The marketplace where buyers and sellers interact with each other and participate in the
trading of money, bonds, shares and other assets is called a financial market.

The financial market can be further divided into four types:

• Capital Market – Designed to finance the long term investment, the Capital market
deals with transactions which are taking place in the market for over a year. The
capital market can further be divided into three types:
(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

• Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorised for small-term investments only. It is a
wholesale debt market which works on low-risk and highly liquid instruments. The
money market can further be divided into two types:
(a) Organised Money Market

(b) Unorganised Money Market

 • Foreign exchange Market – One of the most developed markets across the world,
the Foreign exchange market, deals with the requirements related to multi-currency.
The transfer of funds in this market takes place based on the foreign currency rate.
• Credit Market – A market where short-term and long-term loans are granted to
individuals or Organisations by various banks and Financial and Non-Financial
Institutions is called Credit Market.

Foreign direct investment

Foreign direct investment (FDI) is an investment made by a company or an individual in one

country into business interests located in another country. FDI is an important driver of
economic growth.

Importance of FDI in India

FDI offers many benefits apart from overcoming the economic crisis.

• The inflow of capital: There is an inflow of capital in a company by the foreign

investors or company in exchange for some of the stakes or equity of a company.

• Technology: A developing country also gets access to the latest technology as

investors bring it to the country. Over time, this advanced and modern technology
extends to the local economy, resulting in improved efficiency and productivity.

• Economic growth and employment: A major benefit of FDI is the economic

development of a recipient country. Increased FDI enhances both the services sector
and the development industry. This increases the employment rate in a country by
giving opportunities to trained young people and professional workers.

• Increase in exports: This is one of the biggest impacts of FDI in India. Products are
made not only for domestic use but also for markets around the world. For example,
pharmaceuticals, medicines and vaccines are not just made for the Indian market but
for the whole world. During the pandemic of Covid-19, India became a major
exporter of vaccines and medicines across the world.

• Open market: Foreign Direct Investment or FDI helps develop an atmosphere where
monopolies by domestic companies are broken as foreign companies enter the market.
With the FDI, consumers have access to a wide range of products of good quality at
affordable prices.

• Human resource development: Human capital involves the skill, knowledge, and
competence of a workforce. Knowledge and skill gained via experience and training
help in boosting the level of education and human capital of the recipient country.
Through FDI, human resources can also be trained in other sectors.